Definition
The sunk cost fallacy leads investors to hold or add to losing positions because they've already invested significant money, time, or emotional energy—costs that cannot be recovered regardless of future decisions. Rational decision-making should only consider future expected returns and risks, not past expenditures. "Doubling down" on a failing position to avoid admitting a mistake is a classic manifestation.
lightbulb Example
An investor puts $50K into a startup that is clearly failing. Rather than accepting the loss, they invest another $25K because "we've already put in $50K, we can't stop now." The $50K is sunk—only the expected return on the additional $25K matters.
verified_user Key Points
- Past costs are irrelevant to future decisions
- Leads to "throwing good money after bad"
- Ask: "Would I invest in this today if I didn't already own it?"
- Emotionally difficult to overcome